“Doing well by doing good” is a phrase today’s investors hear more each year. The argument goes that investing can have a social impact in addition to generating profits. Its proponents say that investors should focus on investments that not only affect their bottom lines, but also promote socially conscious goals. Additionally, many socially conscious companies face a lack of access to capital.
In 2014 the UK government created the Social Investment Tax Relief (SITR) scheme, which encourages socially conscious investing through 30% income tax relief. Individuals must hold SITR investments for a minimum of three years, giving investee companies ample time to make full usage of the new funding.
Four years on, however, it seems that SITR fundraising is lagging badly behind other tax-efficient schemes, such as EIS and SEIS. In 2016-17, for example, nearly 3,500 companies raised a staggering £1.8bn under EIS, while 2,260 companies raised £175m via SEIS.
The totals for SITR, unfortunately, were rather bleak. Only 25 social enterprises received investment for a fundraising total of a meagre £1.8m. However, this HMRC statistic may need somewhat of a revision. Big Society Capital suggested to Intelligent Partnership that 50 SITR deals had been made in 2016-17, accounting for just under £9m of investment.
Lack of knowledge
There could simply be a lack of knowledge among individual investors and financial advisors alike about what SITR entails. Charles Owen, director of CoInvestor, told FTAdviser:
“At present, SITR is less widely known as fewer fund managers are promoting it due to lower total investment ceilings. It is presumed that SITR will shortly come in line with EIS in this regard and will then unlock greater investment activity.”
Some of SITR’s many advantages have not been highlighted to a large audience. For example, unlike both EIS and SEIS which are only equity, SITR investments can be structured as either debt or equity, providing more options to the investor.
There are simply better options for investors, including the aforementioned EIS/SEIS. In recent years, the government has tightened restrictions on what counts under the SITR window, and companies can only receive up to £250,000 of government-subsidised investment over three years.
Furthermore, individual investors can invest up to £1m which is less than the limit for EIS/SEIS. Owen alluded to that lower ceiling, but perhaps he was too optimistic in anticipating that SITR investment will catch up with EIS. That said, it is important to note that EIS in particular has been around for significantly longer.
Social investment overblown
Perhaps the socially conscious investing wave that was projected to sweep the nation (and the world) was simply overhyped. Investors are willing to invest in socially responsible businesses, but only if they can match (or closely match) other potential investments that may not have as clear a social/environmental focus.
There will of course be others who invest in social impact with a more philanthropic bias, where they are prepared to achieve lesser returns in favour of benefiting society.
It remains to be seen what exactly is the underlying reason for these disappointing numbers across the board. That said, what is clear is that SITR is not catching on as previously hoped, particularly in comparison to its more established counterparts.